That last one is a big one when it comes to ETN stock because it's currently yielding a healthy 3.5%, 76th highest out of the 409 S&P 500 companies paying a dividend putting it squarely in the top 20%.

As most seasoned investors are aware, efficient capital allocation is the hallmark of great companies. How a business handles its cash in good times says a lot about how it will handle it when things turn bad.

Let's consider Eaton's capital allocation for a moment.

Free Cash Flow

Eaton Corporation pays an annualized dividend of $2.64 a share. It upped its quarterly dividend in February by 10% to 66 cents a share. Eaton has paid dividends every year since 1923; this year's increase was the tenth in a row providing income investors with absolute certainty they're going to get paid every quarter.

You can't put a price on that.

Free cash flow (FCF), for those that aren't aware, is the cash generated by the business in excess of the capital it needs to keep the lights on and the business running.

Generally, companies have five ways it can allocate FCF. These include making acquisitions, paying down debt, paying dividends to shareholders, repurchasing shares and holding it in cash.

None are inherently better when used judiciously.

In 2017, Eaton generated $2.1 billion in FCF, paying out 49.8% of it for dividends and another 39.6% for share repurchases - 11.5 million shares at an average price of $73.91 a share - leaving just $228 million for the three remaining uses.

In the past year, Eaton's net debt has increased by $107 million to $6.07 billion. At just 17.5% of its $34.6 billion market cap, it's definitely not over-leveraged.

On the share repurchases front, its share price had a high of $82.34 and a low of $66.60 for a midpoint of $74.47, 56 cents above what it paid to buy back its shares in 2017. Any time a company pays less than the midpoint it's doing a good job allocating its capital.

As for acquisitions, Eaton's most recent acquisitions were in 2015 when it paid $72 million for two small businesses. In 2017, it sold 50% of its heavy-duty commercial vehicle automated business for $600 million to Cummins Inc. (NYSE: CMI ).

At the end of the day, Eaton managed to convert 63% of its $3.4 billion EBITDA in 2017 into FCF, significantly higher than the 52% conversion rate for 3M Co (NYSE: MMM ).

Bottom Line on ETN Stock

It's been a long time since I've taken a look at ETN stock and I'm glad I did.

Eaton announced healthy first-quarter 2018 earnings in May that included a 10-cent hike in its annual guidance for earnings to a minimum of $5.10 a share giving it a price-earnings ratio less than 15 times earnings.

With ETN stock having basically flatlined over the past five years, up just 13% compared to 69% for the S&P 500, I would say Eaton's 3.5% yield is definitely worth biting into at this stage of the game.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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